Tetra Technologies Inc (TTI) 2005 Q4 法說會逐字稿

Good morning. My name is LaKeisha and I will be your conference operator today. At this time, I would like to welcome everyone to the TETRA 2005 earnings results conference call. All lines have placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS)

Mr. Hertel, you may begin your conference.

Thank you and good morning. Welcome to the TETRA Technologies 2005 fourth-quarter earnings conference call. Joe Abell, our CFO, will assist me with this call. We will both be making short presentations, which will then be followed by questions.

I must first, as I always do, remind you that this conference call may contain statements that are or may be deemed to be forward-looking statements. These statements are based on certain assumptions and analyses made by TETRA based on a number of factors. The statements are subject to a number of risks and uncertainties, many of which are beyond the control of the Company. You're cautioned that any such statements are not guarantees of feature performance and that the actual results may differ materially from those projected in the forward-looking statements.

I also want you to be aware that many of the statements today will refer to data that was included in today's press release. Therefore, I do not intend to reiterate all that data unless responses to your questions require it. Joe, would you start it off please?

TETRA's revenues for the fourth quarter were a record $145.6 million, 33.3% above the fourth quarter of 2004, despite Hurricanes Katrina and Rita, which continued to have an impact through the fourth quarter. Gross profit was $36.1 million, 48.9% above the prior year's fourth quarter. G&A expenses were up 29% year-over-year to $18.7 million, as our businesses have grown, so as a percentage of revenue G&A expenses were down from 13.3% to 12.8%.

Income before taxes and discontinued operations was $16.4 million, up 93.5% compared to the fourth quarter of 2004. Net income for the quarter was$11.2 million or $0.31 per share fully diluted, compared to $5.9 million or $0.17 a share fully diluted in the same period last year, an increase of 88.5%.

Looking at performance by division, revenues in the Fluids Division for the quarter were up 23.3% and profit before tax was $10.3 million, up 118% over last year's fourth quarter. In the Well Abandonment & Decommissioning Division, revenues were up 53% year-over-year and profit before tax was $7.1 million, up 32% compared to last year's fourth quarter. Revenues in the Production Enhancement Division were up 24% year-over-year and profit before tax was $6.9 million, an increase of 54% versus the prior year's quarter.

We had $16.7 million of net investment activity in the quarter. Our debt increased by $25 million over the quarter to $157.3 million. Debt to total capital increased over the quarter from 33.5% to 35.6%.

For the year, we had record revenues and record earnings. Revenues were $531 million and net income was 38.1 million, or $1.05 per share fully diluted.

Note footnote 8 in the financial tables that we have a new presentation of the income statement. Previously DD&A was split between the cost of revenues and general and administrative expense. We have now concluded all DD&A and accretion in one line item in the cost of revenues; therefore, slightly decreasing on the gross margin on a historical basis and also decreasing by an offsetting amount G&A expense.

Geoff, I will turn the consultation back to you.

2005, as Joe said, was a record-setting year for TETRA. Our revenues, gross profits, earnings per share, and split-adjusted stock price all set records. However, I recognize that most of you are a lot more interested in what happens in the future than you are in what has occurred in the past. Therefore, I intend to keep my remarks short, as they relate to the fourth quarter and year of 2005.

As Joe said, our Fluids Division year-over-year during the quarter generated 118% improvement in profits. Our Fluids Division continued to show the improvement during the fourth quarter versus the hurricane-ravaged third-quarter results. This occurred even though the Gulf of Mexico rig count remained at depressed levels. Certain international markets, as well as our domestic onshore market, were particularly strong.

We continued to experience significant cost increases for our brominated CBFs, which were passed along to our customers in the form of price increases. That remains true today, as we have had additional cost and price increases offsetting that in the first quarter of 2006.

In Well Abandonment & Decommissioning, we improved 32% in profits year-over-year in the fourth quarter. As the quarter neared its end, our Well Abandonment & Decommissioning profits began to improve significantly. The primary factor here was the return to profitability of Maritech in December.

As you will remember with the hurricanes, we announced in the third quarter that we actually lost money in September. We actually lost money in Maritech in October. We broke even in November, and the Company was making significant contributions to our bottom line in December. So there was a transition from the lack of production to getting a substantial portion of our production back during the quarter.

Additionally, our Well Abandonment and Decommissioning Services component began to redeploy equipment during the fourth quarter. However, both the Southern Hercules and one of our primary inland rigs did not work at all during the quarter, as both vessels were undergoing modifications. Both of those vessels are going back to work here in the latter stages of the February/early March time period, which gives us a benefit, obviously, quarter-over-quarter first to fourth, and will give us a big benefit second quarter over the first.

I am actually somewhat surprised that this division did as well as it did -- meaning a 32% year-over-year profit increase -- given all the circumstances that I just outlined and it goes to the strength of that market.

Production Enhancement, as Joe said, improved 54%. The fourth quarter saw a significant improvement in the profitability of our production testing business, and we continued to see improvement in Compressco. Both segments were helped by increasing profit from our international operations.

Now let's spend some time reviewing or looking at the future. We hope to replicate our successes of 2004 and 2005 and build for the future. As you remember, we made three -- actually, the three largest acquisitions in our corporate history in 2004. These purchases helped propel 2005, even with the hurricanes, to record earnings.

In 2005, we once again made three acquisitions, this time offshore oil and gas properties. These purchases have the potential to add up to a $0.25 billion of Well Abandonment & Decommissioning work, and at the same time, should help increase Maritech's production by up to 200%.

Unfortunately, the benefits from the 2005 purchases were postponed, as hurricanes curtailed both Well Abandonment & Decommissioning Service work and Maritech production. Consequently, much of the benefit from these acquisitions will occur in 2006.

Already in 2006 we have announced two significant new expenditures. First, we acquired another heavylift derrick barge, the DB-1, and leased an additional vessel, the Anna IV. These vessels will join our fleet to expand our capabilities to perform both conventional and emergency well abandonment and decommissioning work. We estimate that the market for these services in the Gulf of Mexico may increase this year by as much as 250%, thanks primarily to work related from the hurricanes. We believe this level of activity can be sustained for a number of years.

Also this week, we announced our Magnolia, Arkansas bromine and calcium chloride project. This project should help to fully integrate our CBF business. A tight supply market and dramatically higher prices for brominated CBFs in particular make this undertaking extremely attractive for TETRA.

We began integrating our CBF business 18 years ago, and we began acquiring brine leases near Magnolia over a decade ago. With the first phase of this project slated to be operational in late 2007 and the second phase in 2009, this has epitomized the concept of building for the future.

In addition to breaking the 2005 earnings per share record, we have a number of goals for 2006. Already, we have begun to meet some of these goals. First in Fluids, we wanted to find a way to guarantee product availability and to stabilize the cost increases for our customers. We believe the $100 million plus commitment that we have now made to our new Magnolia area complex will yield those results. We are very excited to get the first phase of this project onstream late next year.

Another goal was to find a way to take advantage of the dramatically growing Well Abandonment & Decommissioning market in the Gulf. The addition of the two heavylift derrick barges begins to add the necessary resources. However, we will continue to actively pursue additional equipment, personnel, or even companies that can augment our service offerings in this market. It is our desire to be the preferred integrated provider for these services in the Gulf of Mexico.

Another goal for 2006 is to restore Maritech's production. I'm happy to say that a number of significant properties have begun producing during last couple of weeks. By early March, meaning the next ten days or so, we hope to be producing at least 42 million cubic feet a day equivalent. That number converts oil to gas at 6 to 1, so on a different basis, that is equivalent to 7000 barrels a day net after royalty.

Another important goal for 2006 is the further geographic expansion of our Production testing business. Recent international awards go a long way toward meeting this goal. However, we are still investigating ways to enhance our domestic footprint.

Similarly, we're looking for opportunities to grow Compressco internationally. Our successes in Canada and Mexico need to be replicated in other areas. We are going to actively pursue this in 2006.

We at TETRA our very excited about all of our businesses. We look forward to growing 2006 through our previous acquisitions. Similarly, we intend to build for the future, as none of the growth in our primary markets appears to be of a short-term nature. Joe and I will now be happy to entertain any of your questions.

(OPERATOR INSTRUCTIONS) Jim Rollyson, Raymond James.

Geoff, just first on the bromine project, you have obviously looked at this for a long period of time, and presumably the market environment is now right with the bromine prices having moved up dramatically.

You probably don't want to necessarily talk about all of your economics in terms of what this does for you cost-wise, but can you give us a sense of -- I presume it is going to save you a fair amount on cost of bromine and put you at an advantage to your peers that sell some of the products. Can you talk about how you guys analyze this from a return standpoint or what you're looking at for returns?

I'll give you the best shot that I'm going to give you. Calcium bromide historically has sold all over the lot, and it has, as recently as three or four years ago, been in the low $0.20 a pound. That product is currently somewhere north of $0.70 and maybe going to $0.90.

One of the problems with bromine is that bromine is used for flame retardants and other products that have a much more profitable footprint for the bromine producers than does calcium bromide or zinc bromide or any of the CBFs, even at the new prices. Consequently, as the world economies have grown, we have watched oil and gas become somewhat tight. The same thing is applicable to bromine, in that it goes into a lot of clothing, plastics, telephones, computers, you name it.

The net effect of that is that the bromine producers have been taking these products and essentially fixing them at a certain level and not allowing additional volumes to come into the market.

The reason that we're going to be able to going to this market and increase our production -- assume the may now have 20 or 25% integration and get to one 100% integration -- is that the bromine producers are not really concerned about the calcium bromide and zinc bromide and sodium bromide markets.

How much of that differential of $0.50, $0.60, $0.70 we are going to be able to get is somewhat obviously in question, but we made money in the low $0.20 level. It is currently, as I said, over $0.70. You can presume that we feel confident that we are going to capture a portion of that differential, if not all of it, as we go forward, which should make this extremely profitable. But I'm not about to give you any kind of discounted rate of return on the project.

Fair enough. In retrospect, your hedges look to have been pretty smart, given that you've got gas above 10 and oil in the mid 60s. Can you talk about -- you guys tend to deal with some of the chemicals companies related to your calcium chloride business. Can you talk about what you're seeing and hearing just on the ground from those guys as it relates to gas having come back?

I think everybody's worried about gas prices haven't come back because of the weather and people worry about it going down further. I'm just kind of curious to get your view, since you have some insight there that maybe not everybody else does.

First of all, the short-term spikes in gas or oil, the volatility, is obviously out of anybody's control. So whether you have $5 or $6 gas or $15 gas is subject to the short-term machinations of the market.

However, I think if you talk to the people who are the users of gas, and clearly the petrochemical companies that you're referring to are, if they had another chance at locking in gas at $6 or $6.50 or even $7 an Mcf for an extended time period, it would make their operations a heck of a lot more profitable long-term and would give them confidence to be able to move ahead.

Therefore, what you're probably going to see is exactly what you are seeing, and that is that the short-term prices can fluctuate all over, but you're not likely to be able to go out and buy a five-year strip at $6 an Mcfe. Because these guys are going to be in the market at that kind of level trying to lock up any gas they can get.

All right, last question. You're obviously spending quite a bit of money in the next year to, as kind of you say, building for future growth. When do you think you get to some point in the future when you start getting back to being substantially free cash flow positive?

Well, we throw a lot of free cash flow, but when you are investing as much as we have announced that we are investing, you're obviously adding debt. I think I would answer that a little differently. We have capabilities of spending another $80 million to $100 million without having any difficulty in terms of expanding our lines or doing anything else.

The operations themselves throw substantial cash, so as long as we do not acquire other things, we will be reducing our debt. If we acquire other things, obviously we will be adding to that debt level to some degree. It kind of depends on which of those two things happen first.

But our free cash flow, excluding growth acquisitions, is tremendous. Our EBITDA, I think we've given you this year, is something in the order of 225 or $230 million. We have maintenance CapEx less than $15 million. So most of what we are doing is obviously growing toward the future.

Great, thank you.

Ray Kramer, First Analysis.

A question, I guess, first for Joe. Looking at the tax rate, particularly in the fourth quarter and then for the whole year, it was a little down from what you're looking at next year. Is there any change or should we still be assuming a 36.5% tax rate next year?

I think you should use what we gave you there. The taxes -- the effective tax rate depends on tax credits in a particular year and other events. We try to give as accurate a guidance as possible when we give those figures to you, so I would run with that.

Okay. Then a couple for Geoff. First, looking at Production Enhancement, it was up nicely year-over-year, but sequentially, top line or operating profit basis, it was up much more modestly. Is there some seasonality there or was that sort of just a delayed effect from the hurricanes?

No. Actually, what you were looking at was you were looking at the production enhancement part that was from our Production testing being impacted early in the quarter and then improving throughout the quarter. If you'd look at the exit rate, you’d find that was much higher than what it was for the average for the quarter.

Okay. Then, sort of looking -- with all the announcements and developments since your guidance call in January, are you more comfortable being either at the high or low end of your guidance, with everything that has become public since then?

Well, if I said anything in here other than what I said in there, I would have to go and then put out another press release. So I guess what I'll say is I'm very comfortable with the guidance we gave you in January.

Geoff, this is Allan. You've owned the leases near Magnolia for well over a decade, and on and off have talked. You're finally moving forward in a period of commodity prices that have gone up dramatically.

Could you talk a little bit how you're thinking about this? In other words, perhaps a need to back integrate, a current cost justification, two, three years now from now if the current producers out of the dead Sea, which is to some extent inherently lower-cost, would have vastly expand capacity, how might that -- if you knew that, would it impact your decision today?

Then, how far along do you -- that you can discuss -- in all the preparatory processes of knowledge of the geology and where to drill and confidence you'll come up with brine rather than oil and so forth. Although oil may not be a bad thing. Just whatever you can share for public consumption.

Well, first of all, we're, as I pointed out before, very confident in the profitability of this project, given the fact that we are already in the business, already have a cost basis that is somewhat close to what we're going to be able to do for this incremental production, and have been profitable for many years doing it.

So I think you have to look at the Dead Sea type of production and recognize that there is an inherent cost of transportation, a very large component, to get into this market. So as it would relate to the U.S. market, we're very comfortable in what we're doing. However, it is a bigger project than thinking about just the profitability, although that is obviously the driver.

Our customers are concerned about getting adequate supplies in the future of this product in that it is being drained away -- the molecule of bromine -- for these other products that I mentioned earlier.

We have always told you that we are looking to be in niche markets and we want to be dominating factor in the markets. None of our major competitors are integrated in all of their CBFs. This will put us in a position of being able to offer our customers a relatively guaranteed supply of product in the long-term in a market that we want to be a long-term dominating player in.

Given that fact, it is very logical for us to do this, and we would be doing this even if the prices were, say, half of what they are today, much less where they are today, because we could make an adequate return even at that level.

So we're not concerned about the fluctuating prices. Obviously, we would like to have higher prices than lower prices.

As to the preparatory things that we have done, we have been working behind the scenes for a couple of years on this. We have been actively working for the last six to nine months on this. We have done all of the geology on it that we believe is necessary. We are going to begin drilling brine wells towards the end of the third quarter of this year. We have no doubt that we have brine. The only question in that whole area is the volumes that you get per well, and that you won't know until you're done.

The plants themselves, whether they be calcium chloride or bromine, are not innovative. They are the same as the plants that have gone up historically, so there is nothing particularly dangerous about doing that. I pointed out to you we already have the demand, given that we are a large factor in the market.

Therefore, I think most of our T's are crossed and our I's dotted. Actually, some of the last things that we waited make this announcement for were tax rebates from the state and the local areas for this project. And that held us up for a number of weeks making the announcement.

I appreciate it very much and it looks like it will be a big success. Thank you.

Martin Malloy, Hibernia Southcoast.

Could you talk a little bit about what you're seeing with respect to insurance rates on production facilities in the Gulf of Mexico and how that might impact potential property divestitures?

Sure. There's two primary things going on in the market, and this is a little preliminary because much of that market is determined in the London market, and they are just now coming to grips with exactly what they are going to do. But I can give you some order of magnitude.

Maritech, as a for instance, paid $2.8 million of premiums until we acquired additional properties last year, and that went to something like 4.7 million. Our best guess at the increased costs, and it's earned into our budget, is 18 to 20 million this year. Obviously, when we buy these properties, we try to make sure that we have the ability to pass that cost along.

Secondarily, there is a concern that the industry is going to try and cap the amount of coverage that they will give any operator because of the storms. Our understanding is that the amount of premiums that the industry -- at least the London market -- got last year were about $700 million. The estimated losses are about $8 billion. Consequently, they want to cap it.

Now, what does all that mean? Well, what it means to an operator producing some of these residual 1500 or 1600 platforms out of the 4200 that are out there that are not commercial, at $10 gas, it makes it very, very difficult to continue to operate marginal properties. So it means probably many of those 15 or 1600 platforms are going to be decommissioned or at least attempted to be decommissioned in the relatively near-term.

Secondly, it means that on the other properties that you have where you're getting good production, if you have substantial amount of shut-in wells that have stopped producing, you're going to go out there and plug those wells as soon as you can to take away some of this liability.

So all of this feeds into what we have been telling you about what is happening in this market. The market is being stimulated just because it needed to be about $800 million market in general, and it had been growing toward that level from a $250 million or $300 million market a few years ago.

You couple that with the $8 billion or whatever of damage from the Gulf hurricanes, spread that over a few years, and you end up getting a tremendous increase in the market. And then you couple that with what we just discussed, and that even exacerbates the problem. That is the reason that you see us as aggressive as we are, adding services, personnel, equipment, to try to accommodate some of this market.

We cannot accommodate it all. Neither can the other players in this market. There will be new entries into it. There has to be to accommodate the demand that is going to be out there for the next 3, 4, 5 years.

Thank you.

(OPERATOR INSTRUCTIONS) Thad Vayda, First Albany Capital.

Just a hypothetical. Assuming that you could get -- you could capture all of the margins that are implied with the expansion of the bromine side of your business, what does that do to your aggregate Fluids margins division overall? Are we talking about 2 or 300 basis points or significantly more than that?

If you were able to obtain in your brominated products the current prices and you had that facility completely up, your brominated product price margins would certainly be more than 200 or 300% higher. But also remember you've got calcium chloride in there, and part of this is a calcium chloride facility.

You won't get the same increase in margins that you would in the brominated side, but the rolled-in total would clearly be more than 200 or 300 basis points if you were able to get current prices. We are presuming on the economics of building this that we will be getting prices somewhat less than the current prices.

Okay, that's fair. Thank you.

At this time, there are no further questions.

Thank you very much. I look forward to speaking with you on the first-quarter conference call.

This concludes today's conference call. You may now disconnect.